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If you listen to many of the ‘great and good’ of the investment community, it would seem that we are about to enter a period of dramatically increased commodity scarcity. A dizzying array of factors is apparently to blame from climate change to over-population to warfare to politics... or even lack of politics. So whether your appetite is for water, oil or just Arabica coffee you’re bound to be in trouble.

Prophet of doom proved wrong (Photo credit: Wikipedia)

Of course, such a bleak picture is nothing new. Two hundred years ago one of the pioneers of modern economics, Thomas Malthus, was warning that population was growing faster than food production and the only remedy, if you are willing to accept a lot of dead people as a remedy, would be that population would eventually be held in check by famine. But is something like this – or its contemporary equivalent – the only solution? Won’t our old friend, the price mechanism, step in to save us in a much more positive way?

OK, the price mechanism isn’t perfect. Many commentators blame it for the oil crisis in the 1970s and few of us would be keen to repeat that experience in a hurry. However, in its more benign form it provides a calming effect on markets through balance. High prices in oil, for example, drive down consumption, make the drilling of more difficult wells worthwhile and stimulate investment in alternative energy. Instead of us all running around screaming like the passengers in ‘Airplane’ we all get on with our lives instead.

And the price mechanism isn’t our only likely rescuer. Technology has a pretty impressive track record of sorting out even the biggest of problems. Despite the terrible events in the Horn of Africa in the 1980s and the engineered starvation in the Ukraine under Stalin in the 1930’s, Malthus’ global famine never actually happened. Why? Because technology came up with more resilient crops, better irrigation and fertilisers, more effective farming techniques, effectively ending starvation in major countries like India by the 1970s thanks to the 'green revolution'.

Of course the doom-sayers are unlikely to be swayed by this argument because they never are. A case in point is the latest newsletter from the respected investor, Jeremy Grantham. Grantham is the manager of one of the largest asset management firms in the world, so his opinions matter. In this letter, he warns of an incoming food crisis if current trends continue. But as a former British Chancellor of the Exchequer was fond to say, “Beware of extrapolation: it can make you go blind”. Again and again, doomsayers like Grantham hold one item constant, and draw a straight line to chaos, doom, starvation and war. They usually fail to explain convincingly, however, why innovation, spurred by price, won’t drive substitutes and solutions. Oh, but this time is different. And you know it’s different when they use the terms “paradigm shift” and “phase change” right off the bat.

In sum, if you’re long on commodities, you’re short on human ingenuity. Off course commodity prices might spiral upwards and we’ll be fighting you for a left-over hamburger by January. But if they do, then it will be flounting the trend of the last hundred years. After all what did an ounce of gold buy you in 1912? A decent bespoke suit. What does an ounce of gold buy you now? A decent bespoke suit.

So, when the price mechanism is allowed to work, consumption regulates itself and technology creates substitutes. So perhaps we can all afford to have a good holiday season after all.